How psychology interferes with retirement saving

When it comes to retirement, Americans have a lot of choices to make. How much money should you save? Should you open an IRA? What should you invest in? And the questions don't end after you retire.

Suzanne Shu is an assistant professor at UCLA's Anderson School of Management. She studies choices that people make about self-control and behavior over uncertain timeframes -- like those of retirees.

"Financial choices for retirees are incredibly complex," Shu says. "What we've learned is that some of the psychological biases that influence a lot of the other decisions that people make, especially self-control type decisions like take dieting or saving for retirement, things where you really have to work hard and think about those long-term implications, [impact] retirement decisions that people are making, including things like when to claim their Social Security benefits."

One decision that almost every retiree has to make is when to start withdrawing Social Security benefits. Like that extra slice of chocolate cake, taking a bite out of Social Security early can add up quickly.

"Claiming at 62 is officially defined as 'early claiming.' [The] financial implications of doing that really work out in a way that you are economically better off by waiting," Shu says. "If you claim at 62, there's really a pretty significant penalty. I think it’s about 25 percent ... and then there's a benefit built-in if you can wait past the full retirement age, if you wait until 70.”

Shu adds that those trade-offs are calculated based on average American mortality. "If you can beat the average lifespan of an American, if you're someone who's in good shape and you eat well, then you definitely come out ahead by waiting. Generally for the average person, [wait] until at least 65 or 66 or even till 70."

Ideally, Shu says that retirees should spend their own retirement savings before withdrawing from Social Security.

Despite the difference in benefits, it can be tough for individuals to wait up to eight years to start withdrawing from Social Security. The same psychological biases that control our ability to eat healthy and exercise play a large role in our decisions about Social Security.

"With Social Security claiming, when the opportunity comes up at 62 to start claiming, there's a lot of psychological factors that start coming in," says Shu. "You start thinking, 'Well, I've worked my entire life contributing into the system, I deserve these benefits, I own these benefits. They're mine, and I want them now.'"

"There's also a concern over loss-aversion," Shu adds. "This fear that I'm going to die earlier than I think, I'm going to die earlier than the average [American], and if I haven't claimed [my Social Security benefits], I've lost out somehow. And so I better claim now while I have the chance. Those psychological biases we find are some of the strongest predictors at the individual level of individuals who want to claim early versus waiting until full retirement age or even claiming late."